Revenue at Swedish ERP provider IFS climbed 11% to SKr 682 million for the fourth quarter ended Dec. 31, 2007, on the strength of the EMEA market, although an ongoing dispute with suppliers kept profits virtually flat. And general economic weakening appeared to knock at the door as the company said some customers are delaying payment and undermining cash flow.
Fourth-quarter earnings before interest and taxes (EBIT) edged up only 1.6%, to SKr 64 million. The company blamed the sluggish profits on SKr 10 million it set aside pending the outcome of disputes with suppliers that claim IFS owes them money. It declined to name the suppliers. For the year, revenue grew 7% to SKr 2.36 billion, and EBIT jumped nearly 18% to SKr 141 million. Taxes, however, wiped out that earnings gain and more, leaving IFS with a profit of SKr 122 million, down more than 50% from SKr 246 million in 2006.
Company CEO Alastair Sorbie gave an upbeat outlook for the upcoming year, despite the world's gloomy economy. "Our pipeline was 24% higher at the end of 2007" than at the close of 2006, he told analysts on a conference call Thursday. Although IFS expects the flagging economy to slow sales of business applications into the consumer market, Sorbie said IFS "is fairly immune" because most of its business is with the defense, contracting and service, infrastructure, and energy industries.
Cindy Jaudon, president of IFS North America, echoed Sorbie's assessment in an interview with Managing Automation today. "Our typical customers are a few steps removed from the consumer," she said, noting that IFS' applications for asset management and uptime reliability may look more attractive to manufacturers eager to cut costs in difficult economic times.
The company is keeping an eye on tardy payments from certain customers that it declined to identify but that, it says, caused cash flow after investments to fall to SKr 61 million from SKr 75 million for the quarter, and to SKr 20 million for the year, down from SKr 86 million at the end of 2006. "The 20 [million] is lower than expected," CFO Hakan Zadler told one concerned analyst. "The main reason is we had a couple of large payments which have been delayed. We have, of course, scrutinized these customers. We are certain we'll see these payments in 2008."
For the quarter, the company's SKr 353 million in consulting revenues accounted for 52% of overall sales. But Sorbie stressed, "We're a product-based company," and noted that its latest ERP suite, IFS Applications 7.5, started shipping in January after a fourth-quarter introduction. Maintenance and support, meanwhile, accounted for 26% of revenue at SKr 176 million, while licensing contributed 22% at SKr 148 million. Revenue in all three categories grew, with consulting sales up 13%, maintenance and support up 15%, and license sales growing by 6%.
Geographically, most of IFS' revenue growth came from EMEA. Sales in the Americas fell from SKr 94 million to SKr 88 million for the quarter. But Sorbie said the Americas are improving. After a slow start there in 2007, "we started to regain control the rest of the year," he said.
Still, while IFS did manage to increase license revenue globally, it could not keep up its pace of new customers, signing 177 to the prior year's 188. In the North American market, license revenue actually declined 26% year over year. North American chief Jaudon called the decline "a little concerning," but attributed much of the falloff to defense projects that did not close in the fourth quarter. "The defense business is going to go at its own pace," she noted. She predicted a better 2008 for IFS in North America, saying, "We will see a significant increase in our license revenue and our EBIT."
Booming China has not been a boon to IFS, as Sorbie said IFS is "restructuring" in Asia Pacific, where licensing sales declined. But he singled out the company's win with India's National Hydroelectric Power Corp. as "a strategic milestone for us," noting it was IFS' first deal with a utility in India. Likewise, IFS North America signed its first deal in the utility sector with Horizon Utilities in 2007, something Jaudon said she hopes will be a sign of things to come. The North American unit is now in talks with several other utilities, she revealed.
Sorbie also expressed confidence in IFS' defense business, noting that partnerships with consultants and integrators like EDS, CSC, Booz Allen Hamilton, and SAIC have helped. In general, he said, the company wants to form more partnerships as it continues to position itself as "the alternative to the big guys" like SAP and Oracle.
"IFS is not a household name. We would like to have more partners if we could. We are actively seeking that," Sorbie said.
For 2008, the company expects to increase earnings and "significantly improve" cash flow, but officials did not provide specific targets for either. In March, IFS will demo with selected customers its Aurora user interface, which uses new navigation technologies to create a more integrated and intuitive user experience. The Aurora UI will see wide release this fall.
MA editor Chris Chiappinelli contributed to this report.